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The future of supply chains


Change, change – that’s all I ever hear about. Soon, everything will be back to normal.

Do supply chains have a future? The long, extended supply chains of today are a relatively recent phenomenon, a product of relentless outsourcing in pursuit of ever-lower costs. The pandemic exposed a number of challenges associated with this model and is driving a re-appraisal.

When COVID-19 started to disrupt production and supply, many businesses found themselves exposed. They didn’t know the precise source of key components or sub-assemblies. For many, the first they knew about shortages was when they hit. For others, the worst thing was their inability to anticipate or plan. The early months of the pandemic were characterized by urgent efforts to dig deeper into their supply chains, to identify alternative sources and to develop plans for increased near-shoring or repatriation. Behind the scenes, governments were also acting to encourage increased local production and sourcing, taking steps that are threatening the more open borders and boundaries of the last 20 years.

When it all quietens down ….

Once COVID is behind us, won’t we just return to the way things were? The signs are that there will be meaningful and lasting change. For one thing, supply chain resilience has become a board-level topic. CEOs are talking about a turning-point in the trading environment, about a need to change the balance between ‘just-in-time’ cost efficiency and ‘just-in-case’ risk effectiveness. This means a push for greater transparency, increased stress-testing and more holistic understanding and management of risk. Achieving this will depend in part on re-evaluating supply relationships and associated governance systems, but perhaps the most immediate need is to consider a new integration between people and technology.

Many of today’s business systems are internally-oriented – not just within the corporation, but often within the function. Supply-related data sits in inaccessible and unconnected pools and puddles. Data exchange between customers and suppliers often relies on emails and spreadsheets. All this is far removed from the operations excellence and performance resiliency that top management now sees as necessary. They are talking about a blending of people and technology that builds capabilities through agility, learning, a focus on value and customer experience. This has extensive implications to the nature of supply relationships – the extent of visibility, transparency, reporting; the nature of selection criteria and the extent of cooperation.

There are also major implications for contracts as the nature of risk is re-evaluated, as performance incentives are given increased focus, as terms are designed to provide increased adaptability in handling uncertainty, as governance models are strengthened. The introduction of new, AI-powered systems is starting to shift thinking beyond the one-to-one transactional nature of today’s contracts and to thinking much more about the creation of integrated supply networks and ecosystems. It is this approach that can deliver resilience, operational excellence and rapid innovation. So do supply chains have a future? The answer, clearly, is yes, but as part of a much richer mix of relational models, each of which is marked by far better information flows and predictive capability. Machines will be gathering the data, spotting trends and issuing alerts; we humans must become far better at interpreting and using it, especially in our approach to the way we form and manage customer and supply relationships.

Working from home: stifling or liberating?


Productivity is up. Innovation is down. Transactional activities work fine. Strategic initiatives do not.

Home working is not for everyone

As 2020 draws to a close, these comments appear to reflect the emerging business sentiment about work from home. But are they universal, or does it depend on how well organizations – and individuals – have adapted?

In the early stages of lockdown, World Commerce and Contracting undertook regular spot surveys among its worldwide membership. We found that most organizations moved rapidly to support working from home. Within a few weeks, 92% of survey respondents reported that they had they necessary tools and equipment. Over time, sentiment also changed – in the early days, a majority couldn’t wait to get back to the office. By July, very few wanted to return, at least not on a full-time basis. They had adjusted to new patterns of work and new ways of communicating and meeting with colleagues, customers and suppliers.

Overall, although for some individuals home-working has proved challenging, it does seem likely that productivity has increased – less travel time, less interruptions, shorter meetings. Although gaining access to information has sometimes been more difficult, transactional tasks have mostly been unaffected.

What about innovation?

When it comes to innovation or strategic activities, the argument is that these depend much more on teamwork and collaboration, which are difficult to achieve on-line. However, is this argument valid, or is it just that they require more thought and adaptability? In fields like science, remote collaboration has provided break-throughs for decades. Many businesses have multi-locational teams working on new products or services, often taking advantage of time zones to accelerate development. Indeed, it could well be argued that focusing activities on people who happen to be based in the same office is constraining.

We live in an age where diversity and inclusion are encouraged, to break down narrow and constrained thinking. It is certainly true that for many large organizations, highly inclusive and collaborative behavior is an alien concept. Past research by World Commerce and Contracting revealed the extent to which employees outside the corporate headquarters – and especially those from other cultures – felt excluded from providing ideas or engaging in innovative or strategic projects. Now, we have the opportunity for such exclusion to be a thing of the past. And who knows what ideas and enthusiasm this may unleash.

So my vote is definitely for liberating! What about yours?

Optimizing and securing the contracting process


It is said that ‘contracts are the lifeblood of any business’ – and it is certainly true that without contracts, many businesses would be seen as having no value and with poorly managed contracts – well, there would soon be no business.

Yet while winning and performing contracts is so critical, the contracting process frequently fails to support the steady flow of blood that is essential to its health. Consider for a moment the many blockages that occur – pain points, friction points, delay points – call them what you will, the process rarely runs like a well-oiled machine.

In a recent study, World Commerce and Contracting identified more than 40 ‘friction points’ in the average contracting process – each of them a frequent source of cost and delay. That same study indicated why they often prove so disruptive – it’s because there are very few organizations where someone, some group or function, is responsible and accountable for the quality of the process. Responsibilities are fragmented; data is fragmented; resources are fragmented; and different people have different views of what is important. The result, not surprisingly, is that there are tremendous opportunities to ‘optimize and secure’ the contracting process.

Does this matter? Is it worth caring? The answer is yes, but the benefits to be achieved are highly variable. The type of contract and the industry sector are the two big factors, both in terms of direct costs and consequential losses of revenue or potential savings. The study suggests a typical range from as low as 0.5% of contract value up to 15%+.

It isn’t just financial benefits that matter. Reduced cycle times, greater ease of doing business are two further incentives to streamline contracting. And with the growing availability of technologies that support digitization, this improved blood-flow is certainly achievable.

To discover more, connect to World Commerce & Contracting’s TASK program – a free to members offering that can be accessed at https://www.worldcc.com/Resources/TASKand don’t forget to watch out for our imminent report on understanding and eliminating friction points!

 

Managing Risk and Uncertainty


In 2018, IACCM (now World Commerce and Contracting) was commissioned to identify ‘leading practices in post-award contract management’. Following intensive study, we had not found any organization that could claim a consistent post-award capability, especially for more complex forms of relationship.

Good contract management is not about simply having a robust process and properly skilled and equipped teams. As with any process, the real measure of success lies in the quality of the deliverable and what we discovered was plenty of individual examples of excellence, but none that demonstrated consistency across an entire contract portfolio.

Managing risk is consistently viewed as one of the core purposes for having a contract and therefore lies at the core of contract management. However, that sense of purpose does not necessarily translate into effectiveness. For one thing, many contracts lack balance and seek to apportion risk primarily in the context of consequence (for example, liabilities and indemnities). They do not fully address issues of risk probability (for example, a change in market conditions or poorly defined requirements). This means that resolution of many of the events that occur post-award depends on the strength of the relationship between the parties and the skills and attitudes of the individuals managing that relationship.

The depth of these weaknesses became especially evident with the outbreak of COVID-19. Not only was this the sort of risk that contracts could not accurately predict, it also introduced an extraordinary depth of uncertainty. Contract managers knew that supply was under threat, but struggled to know where that threat would materialize and also found that they lacked the tools to handle it. In general, contracts simply are not designed to manage uncertainty and, while the pandemic is an extreme example, it is in fact indicative of our increasingly volatile and uncertain world.

When we published our report in 2019, this issue was identified as one of the key findings. We observed that a leading practice in post-award contract management would shift thinking from ‘risk management’ and instead embrace ‘uncertainty analysis and management’. This approach led us to create a new ‘Value-Compliance-Uncertainty Framework’ (see chart below), a method by which organizations position their contracts into a risk and uncertainty model which guides the form of agreement and the depth of contract management skills that will be required. The adoption of this model by several leading corporations has equipped them to better identify and manage risk and uncertainty – a critical capability in today’s business environment.

The VCU Framework

Copyright IACCM 2019

‘Managing Risk and Uncertainty’ is the topic of World Commerce and Contracting’s current topic as part of its Tools, Analytics, Skills and Knowledge (TASK) program, which can be accessed at https://www.worldcc.com/Resources/TASK

Compliance vs. Quality: Protecting Your Supply Chain


Compliance has not emerged with glory from COVID-19. For many, it became a source of rigidity that constrained cooperation, limited transparency, delayed important decisions and stood in the way of good commercial judgment.

But there is another way of looking at compliance and that is to see it as a component of quality management. For those who view it this way, supply relationships operate in a very different manner. They offer dynamism, smooth-flowing information and healthy relationships that can flex and support collaboration in managing the chaos created by the pandemic. That’s not to say these organizations don’t care about compliance. In fact, quite the opposite; they think of compliance as a component of a quality management system and ensure that it is designed and adjusted to support business resilience, not simply to impose rules.

Regulators recognize the benefit

Indeed, even the regulators have recognized the damage that compliance can inflict. As an example, the Federal Drug Administration’s recent ‘Case for Quality’ program seeks to shift emphasis and reward consistent high-quality production.

There is abundant research that shows the link between strong, healthy supply relationships and overall corporate performance (for example, the work of John Henke in assessing the automotive industry). World Commerce & Contracting has been conducting more global studies and questioning whether the future is about supply chains, or whether there is a need to think more about supply networks and ecosystems.

The experience of the pandemic has revealed the importance of visibility within and across supply chains. Without this, an organization is blind to areas of weakness and unable to offer support, generate loyalty or plan for alternatives. The many aspects of ‘protecting your supply chain’ are being explored in World Commerce & Contracting’s next TASK topic and can be accessed by members of the association at no charge.

Relational Contracts: your questions answered


In preparation for the World Commerce & Contracting webinar on October 19th, we have been collecting questions from legal and commercial practitioners.

While there is a lot of interest in relational contracts, for many they remain a bit of a mystery. Our aim is to demystify and provide an objective view of when and how this form of contract should be used – or avoided. Among the questions we have received – and which will be answered during the webinar – are:

  1. Why are so many lawyers opposed to the use of relational agreements?
  2. Relational principles are often contained in a separate charter, or may even be embedded in some form of customary practice or operational process. What are the pro’s and con’s of formal contract versus informal charters or codes?
  3. Relational agreements typically apply in longer term and more complex situations where there is a high level of unpredictability and a need for collaborative working. Those situations often involve multiple parties. What makes sense from a contractual perspective – how are the relational elements best introduced – for example, via a teaming agreement?
  4. Are industry codes or standards a better alternative to individually negotiated relational contracts?
  5. Since relational terms govern operational performance and the users of those terms won’t be lawyers, what does this imply for the optimum structure and design of relational agreements?
  6. It has been suggested that relational principles are by nature incompatible with litigation. Does it make sense to eliminate the potential to litigate – for example through binding mediation or the use of an expert panel?

If you have questions you would like added to this list, please send them – and sign up to join us on 19th.

Contracts that manage uncertainty


On October 19th, I will host a webinar ‘Relational Contracting – a risk too far?’ It features discussion with partners from top law firm Cameron McKenna and explores recent court decisions and guidance on the application and use of relational terms. If you would like to join our discussion, please write to me at tcummins@worldcc.com.

Here, I offer some further background.


Relational contracts provide a range of operational mechanisms that often improve the chances for success – but where they really come into their own is in environments of extreme uncertainty or unpredictability.

Logically, in the current business environment, we might expect to see rapid growth in the adoption of relational contracting – but I see no evidence that this is the case.

What is holding us back?

Relational agreements are different. They require a shift in the focus of negotiations and a greater commitment to transparency. By their nature, they impose a heightened level of cooperation and more thoughtful approaches to the way risks are managed.

But I suspect the resistance to adoption goes deeper than a reluctance to accept change. I think there is a level of fear that relational contracts bring with them a degree of uncertainty and unpredictability – and that fear is based on a series of court decisions that appear inconsistent.

In the webinar, we will explore the characteristics that make a contract ‘relational’, when their use may be appropriate and what to watch out for when drafting or implementing relational terms. Our conversation will also reference recent legal decisions, in particular from the English courts.

Risky Business: Contracts and the loss of value


What makes a contract risky – and what are the causes of value loss?

You might think the answers to these two questions would be the same, but it seems they are not. At least, that’s what the input to World Commerce & Contracting’s survey on contract value erosion is telling us. In fact, the picture is quite complicated:

  • Buyers and suppliers have different views about why value loss occurs.
  • Different industries have different views about the factors that make a contract risky.
  • There are multiple views on which types of contract represent the greatest source of risk and value erosion.

Making sense of this data will provide us with far greater insight to the ways buyers and suppliers might work together to reduce risk and secure value. To date, over 200 organizations have submitted data, with a further 30 engaging in detailed interviews. In early November, participants will receive an exclusive report helping them to better evaluate their exposure to risk and loss – and how they might improve the situation.

The survey remains open for further input and can be accessed here.

Most Negotiated Terms 2020: Act tough or play fair?


Markets are in turmoil, businesses face massive uncertainty. In this situation, how and what should I be negotiating?

COVID-19 is transforming the landscape for trading relationships, creating an environment that is unstable and unpredictable. Commercial negotiators are uncertain whether to address this through increased collaboration, or increased confrontation.

The 2020 worldwide study of the Most Negotiated Terms (released on October 7th) reveals a growing gap between industries. Some – like aerospace and oil and gas – can only recover through increased cooperation. Others, like the garment industry or hotels and leisure, have opted for more draconian measures, cancelling contracts and withholding payments. For many, that choice has often depended on the strength of their balance sheets. Do I play tough – and perhaps drive my customers or suppliers to the wall.? Or do I play fair – and try to sustain my customers and suppliers for better times ahead?

Hard choices

The last few months have presented hard choices. Decisions about what and when to negotiate can be critical to survival. Many contract negotiators hope that COVID-19 represents a catalyst for lasting change. For years they have recognized that negotiations tend to be competitive, focusing on risk allocation and price, rather than mutual value. ‘Win-win’ has been little more than an aspiration. Now, almost 60% believe that the pandemic is a catalyst for increased collaboration, for greater transparency of data and improved communication (65%) and for fairer allocation of risks (44%).

To achieve these positive changes, the focus of negotiations must shift to areas of shared interest – increased clarity over mutual goals and objectives, clearer definition of roles and responsibilities, better approaches to the management of change. In the virtual world created by COVID, technology has come into its own – and will be a critical element in enabling change. As case studies increasingly show, it can provide improved data flows, faster and more timely communications, greater inclusion and diversity of ideas and opinions.

Trade – and with it the speed and depth of economic recovery – depends on trust and cooperation. How and what we negotiate has direct impact on whether there is trust, whether there is cooperation. This report shows that the world is finely balanced between forces that increase competition and those that will support collaboration. Each has its time and place. The secret of good negotiation is to understand when to compete, when to compromise and when to collaborate. COVID has perhaps helped us understand the criticality of this evaluation – and that in recent years, we have go the balance wrong.

The Most Negotiated Terms features as one of the major topics in World Commerce & Contracting’s TASK series of free learning programs, including a webinar with leading technology provider Icertis on October 7th, 2020.

Governance in contracts: does anyone care?


When it comes to the most negotiated terms, ‘governance’, along with communications and reporting, does not even make it into the top 30.  Why is that, and does it matter?

The quality of governance is widely understood to have critical importance for business performance. Indeed, many organizations have gone overboard in their implementation of governance boards, sometimes to the point that they are almost operationally disabled. But of course that overkill does not represent quality. Nor does relegating it to a contractual after-thought.

Some thoughts and ideas

There is no doubt in my mind that good contracting depends on coherent forms of governance and that contracts should reflect and support that governance in both form and purpose. Their effectiveness in doing this depends on multiple factors, but among the most critical are:

  • the governance provisions must be universally understood and accepted within each contracting party. Today, often, they are not – they are just words.
  • contracts must be structured and then disseminated in a form that renders them a useful and usable operational framework. Today, in general, they are not – and hence a tendency for many governance provisions to sit outside the contract as guides, manuals or charters, which may then be viewed as optional.
  • building from this point, it may only be when embedded in contract that there is a concern and effort to ensure compatibility between the core terms of contract and those of governance – e.g. in areas such as an appropriate allocation of risk and reward to incentivise the cooperation implicit to good governance.
  • a recognition that relationships operate across a spectrum of dependency and value and this implies a similar spectrum of appropriate governance. There is a steady graduation in the formulation of governance provisions from imposition to mutuality. We must recognise that while mutuality is optimal for theoretical value, in practice it is very hard to develop and sustain because it implies exceptions to standard operating procedures for both parties. That’s why things like industry codes are emerging and may prove to be the way forward.

There is a lively and growing debate over governance and performance management, further accelerated by the experiences of COVID-19. The depth of dependency on contract relationships, the challenges of limited transparency, the need for increased cooperation – these are just some of the factors requiring improved definition of day-to-day operational procedures and practices.

Improvement is challenging

Behind all this there are pressure points that can help or stand in the way. For example, as this year’s Most negotiated Terms report will show, procurement and legal continue in many cases to drive a preventist approach to contracting. Without direct intervention from the CFO, it is proving hard to make the switch from judgments of value at point of input to a more holistic measure of lifetime cost and value. It is also complicated to start thinking about relationships more holistically, for example basing approaches to cooperation across networks or ecosystems rather than apply them one relationship at a time.

Governance matters and people do care. But the journey to better governance is going to require sustained effort and focus from across the organization.

 

It seems to me that our real challenge is to formulate a governance design model that operates across the full spectrum of a business’s external relationships. In this time of major change and uncertainty, there is an added urgency for us to deliver some practical ideas.